Government litigation, governance, shareholders, securities


Studies looking at the impact of the Private Securities Litigation Reform Act have found a mixed market reaction to the law at key events during its passage. We suggest that this is due to focusing on firms within a few industries and their quality of governance, rather than incorporating the real option aspect of securities litigation.When using a framework that is based on potential option payoffs instead, there was a very negative response to the passage of the law across all industries for firms with the highest potential payoffs, even after controlling for other factors such as governance and industry.Governance only becomes significant when the firm is overvalued, creating a positive potential payoff in litigation.

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